Petro-Canada (PCZ): Our view of PCZ has improved, though it remains Sell rated for now - Goldman Sachs - 10/25/07
What's changed
Petro-Canada reported 3Q2007 EPS of US$1.24, essentially in-line with our $1.32 and consensus of $1.21. E&P earnings were better than our projections, with net production of 378 MBOE/d ahead of our 369 MBOE/d estimate, while R&M earnings were modestly lower than our forecast.
Implications
We have a favorable view of Petro-Canada’s downstream assets and its substantial exposure to Canada’s oil sands region; recent share price underperformance has improved risk/reward. However, we maintain our Sell rating (in the context of our Attractive coverage view) given uncertainty on the profitability of its Fort Hills oil sands project as well as our continued skepticism towards the company’s value creation potential in its conventional North America gas and international oil E&P businesses. The recent Alberta royalty changes, while unlikely to have a significant impact on the company’s profitability of existing assets in the region, will raise further questions about the timing and profitability of Fort Hills, a project that remains a critical part of the Petro-Canada story and specifically the company’s ability to offset what we think could otherwise be lackluster production growth. Without a visible catalyst on the horizon to allay these concerns, we believe Petro-Canada shares could continue to lag those of other integrated oils we cover including Marathon Oil, Hess and Murphy Oil (all Buy-rated).
Valuation
Petro-Canada shares are currently trading at 5.0X and 4.3X 2008E and 2009E EV/DACF, slightly below the North American integrated oils average of 5.6X and 4.5X, respectively. Our 12-month price target remains $60 and is based on cash flow, P/E and asset value analyses.
Key risks
Key risk is sustained lower commodity prices. |
